Understanding how the commercial lending process works helps borrowers make better decisions and avoid costly surprises. From application timelines to interest structures, every detail can influence both the cost of borrowing and how easily a loan fits into your business plans. Many business owners expect quick approvals and straightforward terms, only to find that commercial financing often takes time and involves a long list of steps.
This guide explains what to expect at each stage of the process. It outlines typical approval timelines, common loan terms, interest rate options, and the fees that often accompany business financing. It also covers key topics such as balloon payments, prepayment penalties, and personal guarantees. Knowing these details helps you prepare in advance and choose the loan type that best supports your goals.
How long does the commercial loan approval process take?
The timeline for commercial funding can vary from hours to months. It is impacted by:
- The type of financing you’re pursuing
- The lender you’re working with
- The time that it will take you to organize your documentation
Quick funding options like merchant cash advances (MCAs) or factoring can literally fund in hours or days. These products are designed for speed, often with streamlined underwriting that focuses on specific metrics like credit card processing volume or accounts receivable.
Traditional bank loans typically take 30-90 days, depending on the complexity and loan amount. They’re doing thorough due diligence, which takes time but often results in better rates and terms.
Complex financing like construction loans or large commercial real estate acquisitions, can take months. These deals involve appraisals, environmental assessments, architectural reviews, and multiple layers of approval.
Here’s what’s helpful to know: the funding timeline should match your urgency level. If you need capital quickly for a time-sensitive opportunity, we’ll focus on faster funding options. If you’re planning ahead and want the best possible terms, we can pursue longer-term processes that often yield better rates and conditions.
The key is setting realistic expectations upfront and choosing the right financing path for your needed timeline.
What is the typical term (or length) for a commercial loan?
Commercial loan terms are incredibly flexible, ranging from as short as 1 year to as long as 30 years, depending on what you’re financing and your business needs.
Short-term financing (1-3 years) is common for working capital, inventory purchases, or bridge loans. These are designed to address immediate cash flow needs or temporary financing gaps.
Medium-term loans (3-10 years) work well for equipment purchases, business expansions, or refinancing existing debt. The payments are manageable while still paying off the loan in a reasonable timeframe.
Long-term financing (10-30 years) is typically used for commercial real estate purchases or major facility improvements. The longer terms keep payments lower, which is crucial for real estate investments where cash flow matters.
SBA loans often offer some of the longest terms available, which is one reason they’re so popular among business owners who want to minimize their monthly payment obligations.
The trick is matching the loan term to your business strategy. If you’re planning to sell a property in five years, you probably don’t need a 20-year loan. But if you’re buying your forever business location, longer terms might make perfect sense.
What is the difference between a fixed-rate and a variable-rate commercial loan?
This choice can significantly impact your business’s financial planning, so it’s worth understanding the differences.
Fixed-rate loans lock in your interest rate for the entire loan term. Your monthly payment stays exactly the same, making it easy to budget and plan. You know exactly what you’ll pay each month for the life of the loan.
Variable-rate loans have interest rates that can change based on market conditions, typically tied to an index like the Prime Rate or LIBOR. Your payments can go up or down as rates change.
The trade-off is usually between predictability and cost. Fixed rates often start slightly higher than variable rates, but they give you payment certainty. Variable rates might start lower but carry the risk of increases.
In today’s interest rate environment, many borrowers prefer fixed rates for the predictability, especially if they’re planning long-term business strategies. But variable rates can make sense for short-term financing or if you expect to pay off the loan quickly.
Some loans offer hybrid options – fixed for a certain period, then converting to variable. This can give you the best of both worlds, depending on your situation.
What fees are associated with commercial loans?
Commercial loan fees can add up quickly, so it’s worth understanding what you might encounter.
Origination fees are probably the most common, typically ranging from 1% to 5% of the loan amount. This covers the lender’s costs to process and underwrite your loan.
Appraisal fees are standard for real estate loans, usually running $500 to $5,000 depending on the property complexity. You’ll typically pay this upfront, regardless of whether you get approved.
Legal and documentation fees can range from a few hundred to several thousand dollars, especially for complex transactions or commercial real estate deals.
Underwriting fees cover the lender’s detailed analysis of your application. These vary widely but can be substantial for larger loans.
Prepayment penalties aren’t technically fees, but they can cost you if you pay off the loan early. Some lenders charge 1-5% of the remaining balance if you refinance or pay off within the first few years.
Annual fees or servicing fees are less common but do exist with some lenders, particularly for lines of credit or specialized loan products.
The total fees can easily add up to 3-7% of your loan amount, so factor this into your borrowing costs when comparing offers.
What is a balloon payment in a commercial loan?
A balloon payment is a large lump-sum payment due at the end of your loan term, and it’s more common in commercial lending than many borrowers realize.
Here’s how it works: You might have a loan with a 20-year amortization schedule (meaning your monthly payments are calculated as if you’re paying it off over 20 years), but the loan actually comes due in 5 years. At that 5-year mark, you owe the entire remaining balance – that’s your balloon payment.
Why do lenders structure loans this way? It keeps your monthly payments lower while limiting the lender’s long-term risk. They get the benefit of regular payments plus the ability to renegotiate terms when the balloon comes due.
Common balloon structures include:
- 5-year balloon with 20-year amortization
- 7-year balloon with 25-year amortization
- 10-year balloon with 30-year amortization
The big question becomes: what happens when the balloon comes due? Most borrowers either refinance with the same lender, refinance elsewhere, or sell the property to pay off the balance. Very few actually have the cash sitting around to pay off the entire balloon.
This is why it’s crucial to plan for the balloon payment from day one. You don’t want to be scrambling for financing when your balloon comes due.
What is a personal guarantee and will I need to provide one?
A personal guarantee makes you personally liable for the business loan, meaning your personal assets are at risk if the business can’t repay the debt.
There are different types of personal guarantees:
- Full personal guarantee – you’re liable for the entire loan amount
- Limited guarantee – your liability is capped at a specific dollar amount
- Joint and several guarantee – multiple owners are each fully liable for the entire amount
Whether you’ll need to provide a personal guarantee depends on several factors:
- The loan amount and type
- Your business’s credit history and financial strength
- The available collateral
- The specific lender’s requirements
Some borrowers want to avoid personal guarantees at all costs, while others are comfortable providing them if it means getting better rates or terms. Neither approach is right or wrong – it’s about what works for your situation.
Our job is to understand what’s important to you and then source capital that meets your needs, whether that’s with or without a personal guarantee. We know which lenders are flexible on personal guarantees and which ones aren’t, and we can steer you accordingly toward the lenders that match your preferred strategy.
Are there prepayment penalties for commercial loans?
Some commercial loans include prepayment penalties, while others don’t. It really depends on the specific loan product and lender.
Prepayment penalties are designed to protect the lender’s expected return on the loan. If you pay off a loan early, the lender loses out on future interest payments, so they charge a penalty to compensate for that lost income.
Common prepayment penalty structures include:
- A percentage of the remaining loan balance (often 1-5%)
- A specified number of months of interest payments
- A sliding scale that decreases over time
- Step-down penalties that reduce each year
For some borrowers, avoiding prepayment penalties is crucial, especially if they plan to sell the property or refinance within a few years. For others, the penalty might not matter if they plan to hold the loan to maturity.
This is exactly the kind of detail where our team’s expertise makes a difference. We understand what’s important to you and then source capital that meets your specific needs and preferences, whether that’s with or without prepayment penalties.
Conclusion
The commercial lending process can vary widely between lenders and loan types, but preparation and awareness make the difference. Understanding the timeline, fees, and repayment structure before applying allows you to plan more effectively and avoid unnecessary delays.
Our team works with borrowers to simplify this process. We help identify the right financing approach, explain what each lender requires, and guide you through every step until funding is complete. If you are preparing to apply for a commercial loan, reach out to us to discuss your financing needs and get support on the best path moving forward.